OCC official warns about risky auto lending

Lenders are reporting more charge-offs from their auto loans.

Federal regulators have been working consistently over the past few years to avoid a repeat of the Great Recession, instituting tighter lending rules in a number of markets. One area that has remained largely unregulated until very recently is auto loans, which have seen an increase in subprime lending, a practice that has been all but eliminated elsewhere, especially in the housing market.

Darrin Benhart, deputy comptroller for supervision risk management at the Office of the Comptroller of the Currency, spoke at a collections industry conference on Tuesday and warned about dangerous practices on the part of auto lenders. Benhart said that the average size of car loans is up, as are the amounts of debt that are not being collected, a trend that affects both banks and other lenders.

Benhart cited Experian data that shows that the average charge-off for auto loans in the fourth quarter of 2013 reached $8,520, 17 percent more than in the same period of 2012. For banks, which typically give loans to borrowers with better credit scores than other lenders, such as automakers' financial arms, the average charge-off was a still-high $7,618.

In the second quarter, late car payments totaled more than $4 billion in the U.S. According to Equifax, lenders had issued close to $83 billion in auto loans to borrowers with credit scores lower than 640 through July of this year, the highest total for a seven-month period since 2007.

Auto loan management software helps lenders establish interest rates and amortization schedules according to each borrower's credit information. This ensures that payments are made automatically and on time and reduces the risk of default.